Master Budget


Master Budget:

Learning Objective of the Article:

  1. Define and explain the term “master budget”.
  2. What are the parts / components of master budget?
  3. What are its advantages and disadvantages? Give example of master budget.

Definition and Explanation:

The master budget is a summary of company’s plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, abudgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management’s plans for future and how these plans are to be accomplished.

It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets.

Parts or Components and Preparation of a Master Budget:

Following are the major components or parts of master budget. Click on a budget link for detailed study.

  1. Sales Budget
  2. Production Budget
  3. Material Budgeting | Direct Materials Budget
  4. Labor Budget
  5. Manufacturing Overhead Budget
  6. Ending Finished Goods Inventory Budget
  7. Cash Budget
  8. Selling and Administrative Expense Budget
  9. Purchases Budget for a Merchandising Firm
  10. Budgeted Income Statement
  11. Budgeted Balance Sheet
Sales Budget
Ending
Inventory
Budget

Production
Budget
Direct
Materials
Budget
Direct Labor
Budget
Overhead
Budget
Cash Budget
Budgeted
Income
Statement
→ → →
→ →
Budgeted
BalanceSheet
← ← ←
← ←
Selling
and Admn.
Budget

Advantages and Disadvantages of a Master Budget:

Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing.

Some disadvantages of a master budget include the time involved in producing such a budget. This is primarily the reason a smaller company may not make a master budget if the company has a very small managerial staff.

Example of Master Budget:

Click here for example of a master budget. (This is an external link)

You may also be interested in other articles from “Budgeting and planning” chapter:

  1. Profit Planning
  2. Participative or Self Imposed budgeting
  3. Human Factors in Budgeting
  4. Zero Based Budgeting (ZBB)
  5. Budget Committee
  6. Master Budget
  7. Sales Budget
  8. Production Budget
  9. Inventory Purchases Budget for a Merchandising Firm
  10. Material Budgeting | Direct Materials Budget
  11. Labor Budget
  12. Manufacturing Overhead Budget
  13. Ending Finished Goods Inventory Budget
  14. Selling and Administrative Expense Budget
  15. Cash Budget
  16. Budgeted Income Statement
  17. Budgeted Balance Sheet
  18. International Aspects of Budgeting

Other Related Accounting Articles:

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